I won’t be making this common investing mistake

Profits are the name of the investing game, and if there’s one thing The Motley Fool loves, it’s making money. Shares are on a winning streak – up 3 days in a row in the U.S. Not that you’d know it. The media loves a good doom and gloom story. But don’t blame them…we read the damn stuff. If we didn’t read it, they wouldn’t publish it. All of which makes it harder for naturally optimistic souls such as ourselves to be heard. “Shares go up a little bit today, continue to average between 7% and 10% per annum,…

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Profits are the name of the investing game, and if there’s one thing The Motley Fool loves, it’s making money.

Shares are on a winning streak – up 3 days in a row in the U.S. Not that you’d know it. The media loves a good doom and gloom story. But don’t blame them…we read the damn stuff. If we didn’t read it, they wouldn’t publish it.

All of which makes it harder for naturally optimistic souls such as ourselves to be heard.

“Shares go up a little bit today, continue to average between 7% and 10% per annum, over the long-term” doesn’t quite cut it when we are dealing with the potential death of Europe, an ailing American economy, a massive gold bubble, a plunging dollar and collapsing house prices.

That story featured prominently on Fairfax yesterday. More doom and gloom…

“We may live in the lucky country but Australians are in denial about their ever-expanding waistlines and claim to be the unhappiest in the world.”

Why are we so unhappy? One-fifth of the Australians surveyed by BUPA said they suffered from depression, the highest result for any country.

R U OK?

Depression is not something to be treated lightly. On that point, today is R U OK? Day 2011.

As featured on the ABC’s Australian Story, three years ago advertising executive Gavin Larkin used his marketing nous and his high profile contacts to create a national day of awareness called R U OK? Day.

Within nine months, R U OK? Day achieved levels of awareness about depression and suicide prevention that other organisations had failed to achieve over the course of decades.

Their message is simple…

“On this day we want everyone across the country from all backgrounds and all walks of life to ask friends, families and colleagues: “Are you OK?”. It’s so simple.”

Tragically for Gavin Larkin and his family, on a personal level, things are far from okay. The Australian Story episode was one of the most inspirational and moving programs we’ve seen for some time.

Check it out, and next time world stock markets wipe a few bucks from the value of your share portfolio, think how lucky you are to have your health…even if you might be carrying a few extra kilos.

Shares taking a bath

Back to the markets…

With the headlines dominated by the mess in Europe, you’d have thought share markets would be heading down, not up, as the U.S. markets have been doing.

And down is exactly what happened to the ASX yesterday.

“Fears that banks will have to pay more to borrow money and a warning from a senior government official that investors should not rely on China bailing out troubled economies sparked a sell off on the Australian sharemarket, led by banks and resources stocks,” said the Australian Financial Review.

In the blink of an eye, many of Australia’s most popular blue chip shares have taken a bath. Just take a look at how far some of them have fallen from their 2011 highs…

“Unfortunately, it will likely take some time for Cochlear’s shares to recover. This is no quick-fix situation. Often share price falls like this are recovered gradually, not in a hurry. And also, we wouldn’t be surprised to see the shares drift lower in the weeks and months ahead. Buyers today may be able to pick up a world-class company at a reasonable price, but shouldn’t expect near-term fireworks.”

Although many commentators are suggesting Cochlear is a buy at these prices (around $53 as of writing) we stand by our previous comments.

Major product recalls are a serious issue and will take some time to fix. As such, the share price damage will likely take some time to fix, too.

Don’t get us wrong, however. If we see Cochlear’s shares really in the bargain-basement bin, we’d be willing to step up to the plate and take a swing at them. But right now, we’re content to sit it out.

I know it’s hazardous to one’s wealth to try catching falling knives – a rapidly falling share price with strong downward momentum. I know it is better to wait until the knife has hit the floor. Yet, I bought anyway.

Specialty is now down 9% from my purchase price.

So why did I buy and what will I do now?

I bought the shares because I had zero exposure to the beaten down retail sector. I didn’t buy Specialty because I thought it was the best retailer in Australia – it’s not – I bought as I think Specialty has the best risk to return profile amongst Australian retailers.

While it is wonderful to buy great companies and hold them for the long term, it is often the second tier companies that bounce higher after market selloffs. I expect Specialty to be a case in point.

I have no idea when retail will be back in fashion, but now that I have a stake in the game I’ll be paying even closer attention. That focus should allow me to capture a greater portion of the eventual upswing in the retail sector.

I won’t be making this common investing mistake

A mistake many investors make is thinking if a company was good value at one price it must be even better value at a lower price.

That leads to having your largest positions in your worst performing companies – as Peter Lynch said, this is watering your weeds. It’s better to wait to see whether your thesis was right.

A second mistake is thinking that a 10% change in price is meaningful – it’s not.

I won’t be buying more Specialty until the turnaround in the business and investor sentiment is underway. I’ll likely pay a higher price, but then I’ll be watering my flowers instead of weeds.”

Great advice, as ever.

Dean has been actively investing for close to 25 years and has a documented market-beating track record. We can all learn a lot from his stock picking process, and his general investment philosophy. A Master of Applied Finance doesn’t go astray either.

The Foolish Bottom Line

World stock markets remain on a knife-edge. Despite the VIX – otherwise known as the fear index – dropping 6% overnight, it still trades at elevated levels.

The clear message, especially whilst Europe works through its mess, is there’s more sharemarket volatility to come.

We don’t know which way, and by how much, markets will move. But we do know, the bigger the list of shares hitting rolling year lows, the bigger the opportunity to profit.

And if there’s one thing we love when it comes to investing, it’s profits.

Dean Morel has a position in Specialty Fashion. Bruce Jackson has an interest in Commonwealth Bank, Westpac, NAB and BHP. The Motley Fool’s disclosure policy is never down.

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